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Last updated: May 22, 2013 11:35 pm
The US Federal Reserve heralded the beginning of the end for its third round of quantitative easing as Ben Bernanke said it could slow the $85bn-a-month pace of asset purchases “in the next few meetings” if the labour market is strong.
The Fed chairman’s remarks sent markets gyrating before closing sharply down after the minutes of April’s meeting revealed that a “number” of his officials were ready to start tapering off QE3 as early as June.
In testimony to Congress, Mr Bernanke repeatedly said that any move to adjust asset purchases would depend on the economic data, and the Fed could increase purchases again if the outlook got worse.
“If we see continued improvement and we have confidence that that is going to be sustained, then in the next few meetings, we could take a step down in our pace of purchases,” said Mr Bernanke. “If we do that, it would not mean that we are automatically aiming towards a complete wind-down.”
The remarks provide the clearest picture yet of how the Fed is likely to taper off QE3: starting fairly soon, and then adjusting the rate of purchases – most likely downwards but upwards if the economy takes a dip – over a period of time.
But the volatile market reaction – where asset prices have been driven upwards by easy monetary policy – highlights the difficulty of the Fed’s communications task. Although the central bank says that the pace of asset purchases is tied to the state of the economy, it has been unable to explain exactly how, leaving markets desperate for any hint on the timing of a QE3 taper.
The S&P initially rose to set a new intraday peak on Mr Bernanke’s prepared remarks, which struck a dovish tone, asserting the merits of easy monetary policy and the perils of high unemployment.
But the index closed 0.8 per cent down, with losses accelerating after the minutes of the rate-setting Federal Open Market Committee were released at 2pm in New York. The yield on 10-year Treasury debt rose above 2 per cent for the first time since March before closing at 1.93 per cent.
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According to the minutes: “A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting.” But participants covers all nineteen FOMC officials, including some who have always disliked QE3.
That suggests a more likely date for the first slowing of QE3 is the Fed’s September meeting, which is followed by a scheduled press conference from Mr Bernanke, and would give more time to see how tighter fiscal policy is affecting the economy.
“I’m uncertain about what’s going to happen to the economic outlook over the near term because I don’t really understand really well how the tug-of-war between the fiscal drag and the improving economy are going to sort of work their way out over the next couple months,” said William Dudley, president of the New York Fed, in an interview with Bloomberg television.
“I think three or four months from now I think you’re going to have a much better sense of is the economy healthy enough to overcome the fiscal drag or not.”
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